January 2003
By JAMES S. ANCHIN, CPA
Construction firms in the New York metropolitan area have reason to take heart: provided no major unpleasant surprises materialize; construction spending is expected to continue at or near its current high pace in 2003.
Despite the uncertainty about local market conditions, projected budget gaps for New York State and New York City and the geopolitical climate, construction activity is expected to maintain near record levels. Various sources indicate that 2002 construction spending for New York City alone was approximately $15 billion, as compared to $10 billion during the mid-to-late 1990s Ñ making construction activity one of the few bright spots in the local economy. Based upon projected capital improvement plans currently on the drawing board, construction activity is expected to stay at the $15 billion level or even increase slightly over the next few years, giving local contractors reason for optimism.
As with all forecasts, those numbers aren't carved in stone. Certain factors could come into play that may well put a dent in the rosy outlook. One red flag is the slowdown in the design sector. Whether the sector is experiencing a normal and necessary breather after several vigorous years, or is in the initial stages of a longer-turn dip that could negatively impact the industry remains to be seen. Another area of concern is an insurance issue that could act to curtail large-scale construction projects. Proposed projects have already been stalled because federally backed insurance coverage has been slow in forthcoming to guarantee property protection in the event of war or terrorist attacks. While these issues are expected to be resolved in the near future, they are contributing to the uncertainty surrounding many large office projects.
In addition, well-publicized budget gaps at the city and state level could adversely affect ongoing capital improvement programs. Multi-billion dollar deficits are expected for the next several years and these deficits could put a hold on construction of new public facilities such as transportation, education and infrastructure projects. Current programs are likely to proceed, but new proposals may be put on the back burner until new funding or revenue sources can be identified.
Vacancy rates in commercial office space may also influence the rate of future construction spending. In New York City, which is a bellwether for the Metropolitan Area, seven office buildings, with more than eight million square feet of space, will be completed over the next two to three years. But with the recent spate of job cuts and the continued weakness in the local economy, developers may hold back with new projects until key tenants step forward to sign a lease. Certain projects will proceed regardless of market machinations, and public sentiment will certainly push for progress on at least a portion of the World Trade Center site despite the present economic situation. However, the bulk of the construction work to replace the 11 million square feet of office and retail space lost on Sept. 11 will not gear up in earnest for another two to three years. Before then, the redevelopment activity in Lower Manhattan will likely be restricted to public sector work, with several transportation projects expected to be approved for fast-track scheduling.
With respect to sector-specific forecasts, the industry may face a continuation of the current trends. The office interiors sector may see a downturn after several boom years when the robust economy prompted many companies to spruce up their office space. With job cuts on the rise and discretionary funds drying up, companies will be hard pressed to continue their interiors spending spree. Conversely, heavy construction contractors may emerge unscathed as they work to complete projects already in the ground and those with funding in place.
What's on the horizon for the long term? First and foremost, there will still be substantial construction activity as lower Manhattan is rebuilt and revitalized. The industry may be in for an unprecedented upturn in spending. New York City has been selected as this country's contender for the 2012 Olympics Ñ and the final selection as to who will host the games will be made by the International Olympic Committee in 2005. If New York City is selected as the host, construction spending will skyrocket. Early estimates call for at least $6 billion in new facilities and infrastructure to prepare the city to stage the global event.
Therefore, despite a few problem areas and the less-than-positive signs in the economy, there is reason enough for the construction industry to be cautiously optimistic about the future.
About the author: Mr. Anchin is a managing partner of Anchin, Block & Anchin, LLP, a regional certified public accounting firm with offices in New York City and Westchester, that specializes in meeting the needs of contractors in the tri-state area.